Who Pays for Municipal Governments?: Pursuing the User Pay Model for Solid Waste

Today the , of which I am a Commissioner, released a report today called Cutting the Waste: How to save money while improving our solid waste systems.

The full report is here, or you can read a shorter blog here, we also wrote an Op-ed in the Calgary Herald here. Robson Fletcher with the CBC also wrote a nice overview piece here which focused on the model for the City of Calgary here. You might even catch one of us talking about it in the news.

One of the main recommendations of the report is that we should pay for waste through user fees as opposed to through property taxes. It is not about paying more, instead it is about aligning municipal revenues to its expenditures. I want to talk about, first the issue more generally, and then move more specifically to the issue as it relates to solid waste. Suffice to say that the views expressed here are my own, and are based on my own research on municipal user fees as well as on the Ecofiscal report.

User Fees as a Municipal Funding Tool

In municipal public finance, we talk a lot of linking expenditures to revenues, which is a method to ensure that the costs of providing a good or service is borne as directly as possible by those benefiting from the goods, services, and privileges. Where *possible* (I’ll come back to this), the direct users, the beneficiaries, of the goods, services, and privileges should pay the price of providing the goods, services, and privileges.

By charging beneficiaries directly, this ensures that the services are consumed by those who value them the most and the government obtains direct feedback as to whether citizens really desire the provision of the goods, services, and  privileges at the cost incurred. This is what economists call an efficient outcome. Efficiency is achieved when goods and services are produced at the lowest possible cost to the producer and the quantities that are provided are of the greatest possible benefit to the consumer.

When goods and services are instead funded through property taxes then the implicit price of using a particular service is zero. When something is *free*, people tend to use more than they would otherwise, imposing higher costs on everything through increased property taxes. Another side effect of paying for residential services through property taxes is that these costs can also be imposed on businesses, since in many municipalities non-residential property taxes are a multiple of residential property tax rates. That is, when things are paid for through property taxes, businesses end up paying for a service that they do not benefit from or consume and may even end up paying twice for a service since many business services are not provided by a municipality. If we care about the business property tax burden then we care about user fees.

User fees also have accountability embedded in them. By law, user fees are a cost recovery tool, the revenues for which must be solely used to fund the provision of the service, and the fee charged is dictated by the cost of providing the good or service. Accountability related to property taxes, on the other hand, is weak. Taxes are a form of payment for the sole purpose of raising revenue with no connection to the activity being taxed. Property tax revenues can be used to fund any activity and the size of the tax is unrelated to costs.

User fees are important municipal tools, especially when compared to provincial and federal governments, as municipalities are increasingly likely to be involved in matters where the direct beneficiary, the user, is well defined and it is a simple process to extract payment from the user.

The criteria, easily identifiable individual beneficiary from whom payment can be extracted (or, more importantly, can be excluded from benefiting if they do not pay for the service) are essential characteristics for determining if a user levy is appropriate. This is why user fees are good for say garbage, but not, say, sidewalks, fire, police. So user fees cannot and should not be used to fully fund municipalities, but instead be deployed strategically.

The main concern with user fees is regressivity. This means that the cost of user levies is a heavier burden on lower income individuals. Here are a few considerations on that. User fees are equitable on a benefits received basis, one measure of equity. They may not, however, be equitable based on ability to pay. With user levies, all consumers pay for the cost of the good or service regardless of their income, a key measure for ability to pay. It is this concept, ability to pay principle, where the most frequent, and likely the strongest argument against user levies lie.

The literature, however, is not conclusive regarding the regressive nature of user levies. In fact, the evidence suggests three main arguments against user fee’s regressivity. First, upper-income households benefit disproportionately from free public services. For example, upper-income households are more likely to live in large households and consume more than their share of sewage, water, and refuse collection than lower income households when these services are funded through property taxes and not user levies. Second, user levies allow low-income consumers to adjust their consumption to lower levels, thereby paying less than they would under a property tax system. Third, any regressive or disproportionate effects can be minimized or even reversed with careful design, revenue uses, and compensation mechanisms, particularly discounts and exemptions for readily identifiable groups. For example, the City of Calgary has a fairly unique Fair Entry program that responds directly to this concerns.

But it is also important to understand that property taxes also suffer from similar arguments of regressivity. Property taxes are tied to the assessed value of a property which is only loosely tied to the income of the property owner. This incongruence has led to property tax circuit breaker programs that provide property tax relief to low income residents and cancellation of property tax increases. Suffice to say, while user fees dominate on efficiency concerns, both instruments carry concerns regarding equity on the ability to pay side of things, but user levies at least gain some credibility on the benefits received measure of equity.

 User Fees for Solid Waste

Managing solid waste is a significant expense for municipal governments. In addition, the cost of managing waste is rising. Landfills are expensive to build and maintain and many of our landfills are nearing their capacity. For example, the City of Calgary landfill has about 30 years left at current disposal rates and it will cost $1.5B for a new landfill. If, however, we can deploy a model whereby we can both pay for solid waste management AND reduce the amount we are sending to the landfill, we can achieve multiple objectives of cost recovery and cost reduction/avoidance.

Embedding the costs of managing solid waste in property taxes means that there is no alignment of expenses with revenues and there is no incentive to consider the costs you are putting onto the system.  The amount an individual pays for waste management under this system has no connection to the quantity or composition of the solid waste they generate or the external costs they impose on others due to their waste generation. A properly designed waste management fee that recovers the cost of waste management and aligns the costs to the waste generation of the individual is an important step towards reducing the amount of waste we send to the land fill.

While some municipalities, like the City of Calgary, have or are moving to a fully cost recovery user fee system, in many cases the user fee is a flat monthly fee that is unrelated to the amount of waste. While a fixed portion to a waste management fee will be a necessary part of any waste management user fee system, since a portion of waste services is unrelated to use, in order to incentivize waste reduction, the fee must also contain a variable portion. Such a system is commonly referred to as a Pay-as-you-throw (PAYT) system.

PAYT systems can be as simple as a model where the City makes different bin sizes available and your monthly fee is based on the size of bin you select, with smaller sized bins incurring a lower fee than larger sized bins.Variable bin sizes allow households to chose the bin size the best works for them, as opposed to forcing all households into using the same bin. Variable bin sizes increases the options and even allows a household to opt for a bigger bin than a one-sized-fits all model that the one bin size model imposes.

However, it can also contain other features. For example, there can be an additional fee that is levied whenever the bin is emptied into a waste truck. Many waste bins, including those in the City of Calgary, include RFID technology that can be used to apply a fee to households only when they actually set their bin out for collection. It may come as a surprise that annual operating costs can be significantly reduced simply by redrucing the number of times your household has their bin collected. Another example is to have weighing technology that allows for a fee that is based on the weight of the waste a household produces. However, weight-based models can suffer calibration challenges that may make the costs greater than the benefits and should be pursued with caution.

A key concern that comes with PAYT models is illegal dumping. It is essential that appropriate policies with respect to illegal dumping are considered along with PAYT. Such policies include a basic allotment, tag a bag policies, financial relief for low income households, scheduled large waste item pick up, encouraging the use of the second-hand economy, and the like. However, we note in the Ecofiscal report (p. 27) that the evidence surrounding concerns with illegal dumping associated with PAYT may be overstated.

Summary

Moving to a PAYT model is not about paying more for something, it is about paying differently. PAYT models put the control for costs into the hands of the household, where they should be. And PAYT models offer more choice and extends the life of our landfills and helps us avoid future costs.

And if you want to learn more about user fees and funding municipal governments, check out our upcoming School of Public Policy Current Affairs lunch on that topic on October 31 in Calgary.

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